Prestige without Purpose? Reputation, Differentiation, and Pricing in U.S. Equity Underwriting

64 Pages Posted: 2 Oct 2013 Last revised: 9 Mar 2016

See all articles by Chitru S. Fernando

Chitru S. Fernando

University of Oklahoma - Michael F. Price College of Business

Vladimir A. Gatchev

University of Central Florida - Department of Finance

Anthony D. May

Wichita State University - W. Frank Barton School of Business

William L. Megginson

University of Oklahoma

Multiple version iconThere are 2 versions of this paper

Date Written: June 5, 2014

Abstract

Clustering of IPO underwriting spreads at 7% poses two important puzzles: Is the market for U.S. equity underwriting services anti-competitive and why do equity underwriters invest in reputation-building? This study resolves both puzzles. Modeling endogeneity of firm-underwriter choice using a two-sided matching approach, we provide strong evidence of price and service differentiation based on underwriter reputation. High-reputation banks receive average reputational premia equaling 0.65% (0.47%) of average IPO (SEO) underwritten proceeds, which constitutes 10% (13%) of their underwriting spreads. Equity issuers working with high-reputation underwriters receive significant benefits, including higher offer values and lower percentage spreads net of reputational premia.

Keywords: Equity underwriting; underwriter reputation; vertical differentiation; underwriting spreads; investment banking; firm-underwriter matching; underwriting syndicates; analyst coverage

JEL Classification: G24, G32, L14, L15

Suggested Citation

Fernando, Chitru S. and Gatchev, Vladimir A. and May, Anthony D. and Megginson, William L., Prestige without Purpose? Reputation, Differentiation, and Pricing in U.S. Equity Underwriting (June 5, 2014). Journal of Corporate Finance, Vol. 32, 2015. Available at SSRN: https://ssrn.com/abstract=2334034 or http://dx.doi.org/10.2139/ssrn.2334034

Chitru S. Fernando

University of Oklahoma - Michael F. Price College of Business ( email )

Adams Hall
307 West Brooks Street
Norman, OK 73019-4004
United States
405-325-2906 (Phone)
405-325-7688 (Fax)

HOME PAGE: http://faculty-staff.ou.edu/F/Chitru.Fernando-1/

Vladimir A. Gatchev

University of Central Florida - Department of Finance ( email )

Orlando, FL 32816-1400
United States
(407) 823-3694 (Phone)
(407) 823-6676 (Fax)

HOME PAGE: http://www.bus.ucf.edu/vgatchev/

Anthony D. May

Wichita State University - W. Frank Barton School of Business ( email )

1845 N. Fairmount
Wichita, KS 67260
United States

William L. Megginson (Contact Author)

University of Oklahoma ( email )

307 W Brooks, 205A Adams Hall
Norman, OK 73019
United States
(405) 325-2058 (Phone)
(405) 325-1957 (Fax)

HOME PAGE: http://faculty-staff.ou.edu/M/William.L.Megginson-

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